Latin America Economic Forecast

Economic Snapshot for Latin America

July 15, 2015

Economy loses strength in Q1, but dodges contraction

Worsening economic conditions in Brazil and Venezuela hit Latin America’s economic growth in the first quarter of 2015. A GDP growth estimate showed that the region’s economy decelerated sharply in the first quarter after having accelerated in the fourth quarter of 2014. Nonetheless, Latin America’s economy avoided a contraction at the outset of year. The region’s GDP fell from a 0.8% expansion in Q4 2014 to a revised 0.1% increase in Q1 2015 (previously reported: -0.5% year-on-year). The economy avoided a contraction in Q1 mainly due an expansion in Argentina (Q1:+1.1% yoy; Q4: +0.5% yoy); the region’s economic growth was dragged down by a contraction in Brazil (Q1: -1.6% yoy; Q4: -0.2% yoy) and a disastrous plunge in Venezuela (Q1: -7.0% yoy; Q4: -2.8% yoy). Although Venezuela has not released official GDP data since Q3 2014, analysts believe that the economy is spiraling into a deep crisis.

Heading into the second half of the year, many major Latin American currencies weakened notably against the greenback, remaining on the deteriorating trend that has been in place since July 2014. A combination of external factors, such as the next U.S. Federal Reserve interest rates hike and market turbulence from the Greek debt crisis, along with domestic effects like disappointing economic indicators, have exacerbated many major regional currencies’ loss in value in recent weeks. On top of that, global investors appear to favor other emerging-market currencies that offer more attractive yields and less exposure to commodities prices.

Analysts agree that the two major concerns related to weaker exchanges rates in Latin America are a decrease in economic sentiment and the potential pass-through effects on inflation in the coming months. Moreover, with weaker national currencies, importers are likely to feel the negative impact of higher prices, and borrowers in foreign currency will feel a squeeze on credit lines due to higher borrowing costs. The silver lining of the current developments in the region’s foreign exchange markets is that weaker currencies will likely boost exports and fiscal revenues (in local currency) for commodity-dependent countries.

Regional outlook unchanged; panelists still expect a deceleration this year

Latin America is expected to experience tepid economic growth this year. In fact, this could very well be the region’s worst economic performance since the global financial crisis hit the region in 2009. Economists participating in this month’s LatinFocus Consensus Forecast expect the region’s economy to grow a timid 0.5% in 2015. The result matched last month’s forecast, which was revised up due to a methodology change in Venezuela. Moreover, participants in the LatinFocus Consensus Forecast see the region’s economy growing 2.0% in 2016.

Growth forecasts for the region’s largest economies were revised yet again. Brazil’s GDP growth forecast was cut from the 1.2% decrease projected last month to a 1.4% contraction. Mexico’s projection was also revised down this month, from a 2.7% increase last month to a 2.6% expansion. The economic forecasts for other major economies in the region were also cut. Chile’s GDP growth forecast was reduced by 0.3 percentage points this month to 2.5% and Peru’s economy is envisaged growing 3.1% this year (previous estimate: +3.2%). The only growth prospects that were left unchanged over the previous month were those of Colombia. Meanwhile, the economies for which panelists raised the outlook were those of Argentina, Bolivia and Ecuador. Argentina’s economic outlook improved for a fourth consecutive month.

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BRAZIL | Economic growth remains in the doldrums, government measures become increasingly unpopular

Gloomy data continues to emerge from Latin America’s largest economy. After two consecutive quarters of growth, Brazil returned to contraction in the first quarter of 2015, driven largely by shrinking private consumption which recorded its worst result since Q4 2008. Economic activity tallied a second consecutive contraction in April and business confidence fell to a new record low in June. Moreover, the government’s austerity measures and economic reforms that were designed to correct fiscal imbalances have become increasingly unpopular. President Dilma Rousseff’s approval ratings have fallen to an all-time low and her administration is facing intensifying opposition in Congress. On 8 July, Congress approved a bill that raises retirement benefits and directly opposes Rousseff’s austerity agenda. While it is widely expected that Rousseff will veto the bill, increasing dissent in Congress will make it difficult for the government to move forward with additional reforms. 

Low commodity prices, austerity and depressed confidence levels continue to hamper Brazil’s economic prospects. The economy is expected to worsen this year and record the largest contraction in over two decades. LatinFocus panelists see the economy contracting 1.4% in 2015, which is down 0.2 percentage points from last month’s forecast. For 2016, panelists see the economy rebounding and growing 0.8%. 

MEXICO | Private and public consumption support growth in Q1, most-wanted drug lord breaks out from jail

Recent data show that Mexico’s first quarter economic growth was supported by a pick-up in both private consumption and government spending. Private consumption registered the second-fastest increase so far during the administration of Enrique Peña Nieto. Government spending was also up, possibly reflecting the run-up to the June mid-term elections. On the external side, the external sector’s net contribution was positive due to strong growth in exports. The sharp depreciation of the peso that began in the second half of 2014 could help explain the increase in exports volumes. On a negative note, just under 18 months since he was recaptured after being on the run for 13 years, the head of the Sinaloa cartel, Joaquín Guzmán, broke out of jail again on the night of 12 July. The event is a major blow to the Peña Nieto administration, which had taken pride in capturing one of Mexico’s most-wanted criminals.

Mexico’s growth prospects continue to moderate. Economic growth will be supported by both a recovery in the United States and an increase in investments related to the structural reforms. However, the cut in government spending is likely to drag on economic growth. LatinFocus panelists lowered Mexico’s 2015 GDP growth forecasts by 0.1 percentage points over the previous month and now see the economy growing 2.6%. Next year, forecasters see the economy picking up momentum and expanding 3.2%. 

ARGENTINA | Economy expands strongly in Q1, political uncertainty persists ahead of elections

In Q1, Argentina’s economy grew at the fastest pace in over a year as GDP expanded 1.1% on an annual basis. The figure was more than double the previous quarter’s expansion. The economy benefited from stronger private consumption amid lower inflation and higher government spending ahead of the October presidential elections. Conversely, exports faltered and recorded the seventh consecutive annual drop. The mayoral elections held on 5 July in five provinces showed that the ruling Front for Victory (FPV) party was not favored by voters. In fact, FPV came in third in the biggest districts, including the city of Buenos Aires, where Republican Proposal (PRO) party candidate Horacio Rodríguez Larreta won the first round with 45% of the vote. Larreta is Cabinet Chief for Mauricio Macri, the current mayor of Buenos Aires, who is running for president. Recent opinion polls continue to give a slight advantage in the presidential race to the FPV candidate Daniel Scioli over his main opponent Macri, thus raising the possibility of a Scioli victory in the first-round.

Expectations that a new government will implement more orthodox economic policies after the October elections, coupled with a gradual recovery in commodity prices, will support the economy going forward. As a result, LatinFocus Consensus Forecast panelists upgraded their GDP forecast and expect the economy to expand 0.4% in 2015. For 2016, the panel expect GDP to grow 1.6%.

VENEZUELA | Government announces highly-awaited legislative elections amid economic crisis

Venezuelans will head to the polls for legislative elections on 6 December against a backdrop of an economic freefall. Despite a lack of official data, recent evidence suggests that the country’s economic crisis continues to worsen. The bolivar traded in the parallel market fell past 600 VEF per USD in July and dollar shortages combined with soaring inflation have led to large-scale protests and strikes among workers. The government’s popularity has fallen notably in tandem with the economy and early polls show that the fragmented opposition has a chance at winning a majority or two-thirds supermajority in congress. The latter would give the opposition broad powers, including the ability to initiate constitutional reforms and approve certain laws.

Venezuela’s outlook for 2015 remains grim. Recession, skyrocketing inflation and low oil prices are expected to fuel the economy’s largest contraction in over a decade. Moreover, a large amount of uncertainty remains over the upcoming elections and a number of analysts are skeptical that they will be conducted fairly. LatinFocus Consensus Forecast panelists see a 6.1% contraction in GDP for 2015, which is down 0.2 percentage points from last month’s forecast. For 2016, the panel sees GDP falling 2.0%.

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INFLATION | Inflation rises in May

According to more complete data compiled by FocusEconomics, inflation in Latin America rose from 13.0% in April to 13.6% in May. Double-digit inflation persists in Argentina and, although official statistics have not been released, inflation in Venezuela is estimated to have exceeded 100% since April.

Economists surveyed this month by LatinFocus predict that inflation in Latin America will reach 16.8% this year. The result reflects the fact that panelists foresee higher inflation rates in Brazil, Chile, Colombia, Venezuela and three other economies. The situation in Venezuela is still alarming as inflation is expected to be well above 100% at the end of 2015. In 2016, LatinFocus panelists expect inflation in Latin America to fall to 12.0%.

Written by: Ricardo Aceves, Senior Economist

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